China’s online lending restrictions hit big tech companies and regional banks

The Chinese banking regulator has formalized rules that will force Ant Group Co. and other online lenders to have more skin in the game when lending to banks, dealing a blow to a booming business that has helped boost Chinese consumer spending in recent years.

From 2022, the country’s internet lending platforms will need to fund at least 30% of every loan they jointly make with commercial lenders, including banks, trust companies and finance companies. Individual banks will also be subject to new caps on the amount they can lend with online partners, according to regulations released by the China Banking and Insurance Regulatory Commission on Saturday.

Several analysts said on Monday that the rules targeted large tech companies, including Ant and WeBank, a large online lender backed by Tencent Holdings. Ltd.

Both have become major originators of unsecured personal and small business loans working with dozens of commercial lenders who provide most of the funds. Ant and WeBank declined to comment.

Ant, in particular, has come under intense regulatory scrutiny since its successful initial public offerings were withdrawn in early November last year. Alipay owner, with more than one billion users in China, has partnered with around 100 commercial lenders, including many small regional banks and trust companies, to provide loans to hundreds of millions people, thus reaping significant benefits.

At the end of June 2020, Ant had the equivalent of $ 267 billion in outstanding consumer loans, accounting for nearly a fifth of the country’s outstanding household short-term debt. Only 2% of that total was funded by the Hangzhou-based company. Its consumer loan departments, Huabei and Jiebei, have provided credit to many young spenders in China who are not eligible for bank-issued credit cards.

Ant collected interest income commissions from banks on loans, helped commercial lenders assess risks, and returned payments to them. Its partnerships with weaker financial institutions with weak risk management capabilities, however, made regulators concerned about how Ant left almost all risk of default to lenders.

Under the new regulations, banks will have to limit their co-loans with any internet platform to 25% of their Tier 1 net capital, while the total online loans they make in this way cannot exceed 50% of their outstanding loans. Regional banks will not be allowed to provide loans online to borrowers who live outside of their jurisdiction.

“The new rules may prevent banks from relying too much on online lenders for credit scoring and from focusing too much on selective fintech partners. It also effectively fills the regulatory void allowing regional banks to expand outside of home regions via online lending, ”Citigroup analysts said in a research note.

They added that Chinese regional banks would be deprived of what had been a source of business growth in recent years, as the change would severely restrict their operations.

Days before Chinese fintech giant Ant Group went public in what would have been the world’s largest listing, regulators put plans on hold. WSJ’s Quentin Webb explains the sudden turn of events and what the IPO suspension means for Ant’s future. Photo: Aly Song / Reuters

Ant has started to reduce the amount of loans she is giving and has lowered the credit limits for some borrowers. The group is also planning to transform itself into a financial holding company and comply with stricter capital requirements.

Not all internet funding platforms will be severely restricted by the new rules. New York-listed Lufax Holding Ltd. said Monday it is analyzing the new rules and their impact on its business, and expects to be in compliance when they take effect. The fintech company has already gradually taken on more risk from the online loans it issues, he added.

Earlier this month, a senior Lufax executive told analysts that the company’s lending business primarily serves small business owners to meet their operating needs. “We understand that current policies are aimed at preventing excessive consumer borrowing costs and the excessive expansion of consumer credit limits by young consumers,” said Yu Chen, who oversees investor relations, the business development and other activities at Lufax. He added that the company is in active dialogue with regulators about its business.

Lufax’s U.S. certificates of deposit have gained 26% since their public debut in late October, giving the company a market cap of $ 39 billion.

The latest rules “show that the authority is not done with strengthening supervision of the sector, and major players still need to prepare for more headwinds,” said Ma Xiangyun, analyst at Soochow Securities , a brokerage house in eastern China.

Write to Xie Yu at

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David A. Albanese

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